The Effects of Foreclosure: Problems and Solutions
The housing crisis that we are currently in has had a far reaching and lasting effect in various components of the housing industry, economy and society in general. Arguably, the collapse of the housing industry has been a key component in triggering the recession we are currently in. The crisis has also had an impact on individuals in terms of their financial situation. The most disastrous effect of the crisis has been a spike in foreclosures which has left a glut of abandoned homes, which has further depressed housing values and consumer confidence. While the problem is evident, it has also raised a series of questions, prompting one to ask; “what can be done? What other issues have resulted from this? And “what other problems has this led to?” The purpose of this post is thus to examine and analyze these various inquiries and issues.
Often times the first thing in peoples’ minds that are facing this situation is finding a solution to the problem. While negotiating with a lender and seeking a modification is a viable solution to the problem many struggling homeowners are having problems reaching a favorable compromise their lender. This is because lenders are primarily looking out for their bottom line, so it thus follows that a lender will assist so long is it will cost them less than having the house foreclosed on. There is also the consideration that the borrower may possibly default on the loan again. On the borrowers part, the “compromise” may not seem so attractive particularly if the payment was reduced very little or if they happen to be very “upside down” on their house. Allowing the borrower to stay in the home and continue his/hers mortgage obligations is course the most favorable scenario to the borrower and lender, the trick is to make the situation appealing to both parties.
One other possible solution to this problem is refinancing into a lower interest rate. Refinancing can be a very powerful and effective long term solution to alleviating a struggling homeowners woes but it certainly is not meant for everyone, perhaps it is only meant for a small minority. The problem with refinancing is that most lenders require a certain amount of equity in the home, and due to tightening standards a superior credit score is also necessary. Equity or a lack of seems to be the greatest problem, as many individuals during the housing boom purchased homes with little or no down payment and often made interest only payments. This is compounded to the fact that home values have dropped significantly, together these two factors make it impossible to refinance. Typically for a refinance applicants need a credit score above 720 and equity of 20 percent, rendering the opportunity available only to a select few. A Few ways that distressed homeowners with little equity in their homes can refinance is either by obtaining mortgage insurance or refinancing through FHA which requires only a small down payment.
While there are some viable solutions for distressed homeowners many unscrupulous individuals are trying to exploit the situation by creating the perception that they are in fact part of the solution. With this I am referring to many of the so called “mortgage consultants” who for a substantial fee claim they can alleviate a distressed homeowners financial woes and allow them to remain in their home. While I have covered this topic previously, I am again focusing on it in order to raise awareness and highlight what a serious problem this is, not to mention the fact that it is illegal. The Los Angeles Daily News reports that in Los Angeles County these outfits and subsequent investigations have greatly proliferated in the last year. According to FBI statistics the number of mortgage fraud complaints have tripled from 21,000 in 2005 to 63,000 in 2008. Unfortunately, these statistics also indicate that the increase in complaints means that the outfits also grown to be more successful at defrauding vulnerable homeowners. What is also unfortunate is that many distressed homeowners mistakenly consider these outfits as viable solutions to their problems, mainly because these outfits target the homeowners’ ignorance, and anxieties. The one thing we can tell distressed homeowners is that these outfits are not a viable solution to their problems, in fact what they are doing is illegal and can further compromise their efforts to save their home.
Finally what many distressed homeowners are considering solution, albeit a disastrous solution is simply accepting the foreclosure and walking away. Walking away from a home is not only disastrous because you are losing your home and whatever you have invested into it, but it is also disastrous because of its long lasting impact. The lasting impact of foreclosure manifests itself on a person’s credit which according to many is akin to bankruptcy in terms of its severity. This can affect an individual’s ability future financial stability and well being by making it more difficult to secure certain jobs, obtain loans, or qualify for housing. A major reason why homeowners ultimately decide to walk away is simply because they are upside down on their loan. While there are often cases where the owner cannot make the payment and is upside down, there are also cases where the owner can indeed afford the monthly payment but none the less decides to walk because he/she is upside down.
This phenomenon is being primarily attributed to a recently adopted mindset by new homeowners who are now viewing a home primarily as an investment and themselves as investors. Unlike typical Wall Street type investors who seemingly have a more thorough understanding of markets and investing these pseudo “homeowner investors” fail to realize a few things. One is that eventually the market will rebound and they will eventually have the equity in their homes to achieve a favorable refinance or eventually sell and recoup their money. Second, is that unlike Wall Street where one can dump unproductive investments, take a loss and walk away, when dealing with real estate taking a similar course of action would come with severe consequences such as severely damaging a persons’ credit. Finally if an individual wishes to adopt the mindset of the homeowner investor, the individual must also accept the implied risks that come with investments. Generally walking away should only be seen as an emergency or last resort solution. A decision to walk away should only be made after all other options such as negotiating, refinancing or working with a HUD approved counselor have all been exhausted and rendered futile. For some who went in over their heads the decision to walk away can serve as a painful life lesson which will hopefully allow the individual to plan and rationalize more effectively the next time he/she wishes to buy a home.
Not a bad article but you lack the substance of the problem. At the end you mention investors and people who over extended themselves. Those people are not the problem of this crisis. The people who have lost their jobs and are losing their home by no fault of their own.
The system we have in place needs to change from good people can afford to pay and losers can’t afford to pay.
This is a fundamental problem that leaves pride and ego running ram pet on our society and is causing families to fall.
THis is the problem.
Exactly. My husband and I paid our mortgages on time, every month, until his hours in the hospitality field were dramatically reduced, and our income was slashed by 75%. A few weeks later, I lost my job due to budget cuts, and haven’t found another even with months of proactive searching. We were sensible with the home we purchased, which is in many cases a “starter home”, but yet, this article paints individuals facing foreclosure as irresponsible and neglectful. Quite the contrary-hardworking, responsible, and educated Americans are losing their homes simply because of job loss/hours reduction and can no longer pay.
I love to read this article. This is very superior post. Thanks